Spinning the Biz of Genomics

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Spinning the Biz of Genomics

Genomics has been a buzzword since the Human Genome Project began making headlines, but investors are increasingly uncertain how genomics firms will ever stay afloat.

One firm, however, has confidence in its business plan despite being lumped into the genomics category by many reporters and investors. Human Genome Sciences CEO William Haseltine says his company will succeed by sticking to the business model it has always had: old-fashioned drug discovery.

A trend seems to have started with companies like Celera Genomics (CRA) and Incyte Genomics (INCY) morphing into "drug discovery" companies, even as "genomics" – the study of genes to learn about human health – remains in their names. Human Genome Sciences (HGSI) is part of no such trend, Haseltine said.

Until recently, Celera and Incyte relied on selling subscriptions to databases of proprietary genetic information. Even though the subscriptions can cost many millions of dollars, such a model appears unlikely to sustain in the long-term.

Using the databases to develop their own drugs is looking more and more attractive to firms, especially since analysts tend to value drug discovery companies more than genomics companies.

Human Genome Sciences, Haseltine said, has been in the drug-discovery business all along.

Until this week, the company exclusively licensed its database to five major pharmaceutical companies in a deal they called the Human Gene Therapeutic Consortium. Now that the agreement has expired, Haseltine said his company is free to develop drugs and claim a significantly higher percentage of the profits.

"We will continue to use the HGS technology to find new drugs," he said. "The difference now is the context in which we can develop them. Heretofore all drugs we go to clinical development (with) were subject to options by GlaxoSmithKline to develop and co-market. That's no longer true of new drugs."

Analysts were encouraged by the company's new turn.

Mike King of Robertson Stephens reiterated a strong buy rating for Human Genome Sciences and predicted the stock price would reach $92 over the next year, while James Reddoch of Banc of America Securities rates the company a buy, with a one-year target price of $81.

When the GlaxoSmithKline deal was signed, Human Genome Sciences had $10 million on hand and was $70 million in debt. Now that its stock market performance has stuffed the company coffers to the tune of $1.8 billion on hand, Haseltine said he'll judge future deals according to quality, not quantity.

Robertson Stephens' King said he expects more drugs to come from the company directly rather than from joint ventures.

While continuing to share in drug development, HGS plans to invest more in the earlier phases of research, which are cheaper, and contract out the expensive later stages.

Altogether, the five companies previously in the consortium are pursuing 430 drug candidates. Human Genome Sciences has 50 of their own and expects to enter three to four drug candidates into clinical trials each year starting in 2002, Haseltine said.

That's significantly higher than the one to two drug candidates pharmaceutical companies currently enter into trial. Only 10 percent of those are approved by the Food and Drug Administration.

Haseltine said his company's strategy of developing and selling drugs gives it an advantage over firms that choose to sell raw genomic data or create hardware or software to interpret the information.

"Our consumer is every person with a disability," Haseltine said. "Theirs is a small group of researchers on a limited budget."

He also pointed to Human Genome Sciences' access to about 70,000 genes that other researchers don't have.

Researchers with Celera and the Human Genome Project, the two groups that mapped the human genome, published papers in February estimating the total number of human genes to be around 30,000 – a surprisingly low number compared to previous estimates of 100,000.

Haseltine criticized the low count, saying the estimate was based on bad data using unreliable methods. And of the genes the researchers did find, he said not enough information is available to surmise what proteins the genes create, which is crucial for determining the biological function of genes.

"The fact that they are missing 70,000 genes is not the only problem with that information," he said. "Even the genes they did find are incomplete. It's a real mess."